GENWORTH FINANCIAL INC, 10-Q filed on 5/3/2017
Quarterly Report
Document and Entity Information
3 Months Ended
Mar. 31, 2017
Apr. 27, 2017
Document Information [Line Items]
 
 
Document Type
10-Q 
 
Amendment Flag
false 
 
Document Period End Date
Mar. 31, 2017 
 
Document Fiscal Year Focus
2017 
 
Document Fiscal Period Focus
Q1 
 
Trading Symbol
GNW 
 
Entity Registrant Name
GENWORTH FINANCIAL INC 
 
Entity Central Index Key
0001276520 
 
Current Fiscal Year End Date
--12-31 
 
Entity Filer Category
Large Accelerated Filer 
 
Entity Common Stock, Shares Outstanding
 
498,948,884 
Consolidated Balance Sheets (USD $)
In Millions, unless otherwise specified
Mar. 31, 2017
Dec. 31, 2016
Assets
 
 
Fixed maturity securities available-for-sale, at fair value
$ 60,597 
$ 60,572 
Equity securities available-for-sale, at fair value
709 
632 
Commercial mortgage loans
6,107 
6,111 
Restricted commercial mortgage loans related to securitization entities
122 
129 
Policy loans
1,761 
1,742 
Other invested assets
2,272 
2,071 
Restricted other invested assets related to securitization entities, at fair value
84 
312 
Total investments
71,652 
71,569 
Cash and cash equivalents
3,018 
2,784 
Accrued investment income
717 
659 
Deferred acquisition costs
3,207 
3,571 
Intangible assets and goodwill
381 
348 
Reinsurance recoverable
17,681 
17,755 
Other assets
703 
673 
Separate account assets
7,327 
7,299 
Total assets
104,686 
104,658 
Liabilities and equity
 
 
Future policy benefits
37,291 
37,063 
Policyholder account balances
25,383 
25,662 
Liability for policy and contract claims
9,295 
9,256 
Unearned premiums
3,370 
3,378 
Other liabilities ($3 and $1 of other liabilities are related to securitization entities)
2,657 
2,916 
Borrowings related to securitization entities ($13 and $12 are carried at fair value)
68 
74 
Non-recourse funding obligations
310 
310 
Long-term borrowings
4,194 
4,180 
Deferred tax liability
75 
53 
Separate account liabilities
7,327 
7,299 
Total liabilities
89,970 
90,191 
Commitments and contingencies
   
   
Equity:
 
 
Class A common stock, $0.001 par value; 1.5 billion shares authorized; 587 million shares issued as of March 31, 2017 and December 31, 2016; 499 million and 498 million shares outstanding as of March 31, 2017 and December 31, 2016, respectively
Additional paid-incapital
11,964 
11,962 
Net unrealized investment gains (losses):
 
 
Net unrealized gains (losses) on securities not other-than-temporarily impaired
1,233 
1,253 
Net unrealized gains (losses) on other-than-temporarily impaired securities
10 
Net unrealized investment gains (losses)
1,243 1
1,262 1
Derivatives qualifying as hedges
2,036 2
2,085 2
Foreign currency translation and other adjustments
(183)
(253)
Total accumulated other comprehensive income (loss)
3,096 
3,094 
Retained earnings
451 
287 
Treasury stock, at cost (88 million shares as of March 31, 2017 and December 31, 2016)
(2,700)
(2,700)
Total Genworth Financial, Inc.'s stockholders' equity
12,812 
12,644 
Noncontrolling interests
1,904 
1,823 
Total equity
14,716 
14,467 
Total liabilities and equity
$ 104,686 
$ 104,658 
Consolidated Balance Sheets (Parenthetical) (USD $)
In Millions, except Share data, unless otherwise specified
Mar. 31, 2017
Dec. 31, 2016
Other liabilities, securitization entities
$ 3 
$ 1 
Borrowings related to securitization entities, fair value
$ 13 
$ 12 
Class A common stock, par value
$ 0.001 
$ 0.001 
Class A common stock, shares authorized
1,500,000,000 
1,500,000,000 
Class A common stock, shares issued
587,000,000 
587,000,000 
Class A common stock, shares outstanding
499,000,000 
498,000,000 
Treasury stock, shares
88,000,000 
88,000,000 
Consolidated Statements of Income (USD $)
In Millions, except Per Share data, unless otherwise specified
3 Months Ended
Mar. 31, 2017
Mar. 31, 2016
Revenues:
 
 
Premiums
$ 1,136 
$ 794 
Net investment income
790 
789 
Net investment gains (losses)
34 
(19)
Policy fees and other income
211 
221 
Total revenues
2,171 
1,785 
Benefits and expenses:
 
 
Benefits and other changes in policy reserves
1,246 
860 
Interest credited
167 
177 
Acquisition and operating expenses, net of deferrals
270 
394 
Amortization of deferred acquisition costs and intangibles
94 
99 
Interest expense
62 
105 
Total benefits and expenses
1,839 
1,635 
Income from continuing operations before income taxes
332 
150 
Provision for income taxes
116 
23 
Income from continuing operations
216 
127 
Loss from discontinued operations, net of taxes
(19)
Net income
216 
108 
Less: net income attributable to noncontrolling interests
61 
55 
Net income available to Genworth Financial, Inc.'s common stockholders
155 
53 
Income from continuing operations available to Genworth Financial, Inc.'s common stockholders per share:
 
 
Basic
$ 0.31 
$ 0.14 
Diluted
$ 0.31 
$ 0.14 
Net income available to Genworth Financial, Inc.'s common stockholders per share:
 
 
Basic
$ 0.31 
$ 0.11 
Diluted
$ 0.31 
$ 0.11 
Weighted-average common shares outstanding:
 
 
Basic
498.6 
498.0 
Diluted
501.0 
499.4 
Supplemental disclosures:
 
 
Total other-than-temporary impairments
(1)
(11)
Portion of other-than-temporary impairments included in other comprehensive income (loss)
Net other-than-temporary impairments
(1)
(11)
Other investments gains (losses)
35 
(8)
Net investment gains (losses)
$ 34 
$ (19)
Consolidated Statements of Comprehensive Income (USD $)
In Millions, unless otherwise specified
3 Months Ended
Mar. 31, 2017
Mar. 31, 2016
Net income
$ 216 
$ 108 
Other comprehensive income (loss), net of taxes:
 
 
Net unrealized gains (losses) on securities not other-than-temporarily impaired
(12)
807 
Net unrealized gains (losses) on other-than-temporarily impaired securities
(4)
Derivatives qualifying as hedges
(49)1
257 1
Foreign currency translation and other adjustments
119 
216 
Total other comprehensive income
59 
1,276 
Total comprehensive income
275 
1,384 
Less: comprehensive income attributable to noncontrolling interests
118 
156 
Total comprehensive income available to Genworth Financial, Inc.'s common stockholders
$ 157 
$ 1,228 
Consolidated Statements of Changes in Equity (USD $)
In Millions, unless otherwise specified
Total
Common stock
Additional paid-in capital
Accumulated other comprehensive income (loss)
Retained earnings
Treasury stock, at cost
Total Genworth Financial, Inc.'s stockholders' equity
Noncontrolling interests
Balances at Dec. 31, 2015
$ 14,637 
$ 1 
$ 11,949 
$ 3,010 
$ 564 
$ (2,700)
$ 12,824 
$ 1,813 
Comprehensive income:
 
 
 
 
 
 
 
 
Net income
108 
53 
53 
55 
Other comprehensive income, net of taxes
1,276 
1,175 
1,175 
101 
Total comprehensive income
1,384 
 
 
 
 
 
1,228 
156 
Dividends to noncontrolling interests
(52)
(52)
Stock-based compensation expense and exercises and other
Balances at Mar. 31, 2016
15,973 
11,952 
4,185 
617 
(2,700)
14,055 
1,918 
Balances at Dec. 31, 2016
14,467 
11,962 
3,094 
287 
(2,700)
12,644 
1,823 
Cumulative effect of change in accounting, net of taxes
Comprehensive income:
 
 
 
 
 
 
 
 
Net income
216 
155 
155 
61 
Other comprehensive income, net of taxes
59 
57 
Total comprehensive income
275 
 
 
 
 
 
157 
118 
Dividends to noncontrolling interests
(39)
(39)
Stock-based compensation expense and exercises and other
Balances at Mar. 31, 2017
$ 14,716 
$ 1 
$ 11,964 
$ 3,096 
$ 451 
$ (2,700)
$ 12,812 
$ 1,904 
Consolidated Statements of Cash Flows (USD $)
In Millions, unless otherwise specified
3 Months Ended
Mar. 31, 2017
Mar. 31, 2016
Cash flows from operating activities:
 
 
Net income
$ 216 
$ 108 
Less loss from discontinued operations, net of taxes
19 
Adjustments to reconcile net income to net cash from operating activities:
 
 
Gain on sale of business
(20)
Amortization of fixed maturity securities discounts and premiums and limited partnerships
(33)
(38)
Net investment (gains) losses
(34)
19 
Charges assessed to policyholders
(183)
(191)
Acquisition costs deferred
(22)
(50)
Amortization of deferred acquisition costs and intangibles
94 
99 
Deferred income taxes
93 
Trading securities, held-for-sale investments and derivative instruments
365 
21 
Stock-based compensation expense
10 
Change in certain assets and liabilities:
 
 
Accrued investment income and other assets
(79)
(159)
Insurance reserves
377 
36 
Current tax liabilities
(37)
(8)
Other liabilities, policy and contract claims and other policy-related balances
(112)
406 
Net cash from operating activities
655 
256 
Cash flows used by investing activities:
 
 
Fixed maturity securities
1,060 
840 
Commercial mortgage loans
166 
192 
Restricted commercial mortgage loans related to securitization entities
Proceeds from sales of investments:
 
 
Fixed maturity and equity securities
2,173 
905 
Purchases and originations of investments:
 
 
Fixed maturity and equity securities
(2,710)
(2,042)
Commercial mortgage loans
(161)
(200)
Other invested assets, net
(676)
34 
Policy loans, net
10 
Net cash used by investing activities
(142)
(255)
Cash flows used by financing activities:
 
 
Deposits to universal life and investment contracts
218 
571 
Withdrawals from universal life and investment contracts
(467)
(517)
Redemption of non-recourse funding obligations
(1,620)
Repayment and repurchase of long-term debt
(326)
Repayment of borrowings related to securitization entities
(7)
(10)
Dividends paid to noncontrolling interests
(39)
(52)
Other, net
(9)
13 
Net cash used by financing activities
(304)
(1,941)
Effect of exchange rate changes on cash and cash equivalents
25 
31 
Net change in cash and cash equivalents
234 
(1,909)
Cash and cash equivalents at beginning of period
2,784 
5,993 
Cash and cash equivalents at end of period
3,018 
4,084 
Less cash and cash equivalents held for sale at end of period
41 
Cash and cash equivalents of continuing operations at end of period
$ 3,018 
$ 4,043 
Formation of Genworth and Basis of Presentation
Formation of Genworth and Basis of Presentation

(1) Formation of Genworth and Basis of Presentation

Genworth Holdings, Inc. (“Genworth Holdings”) (formerly known as Genworth Financial, Inc.) was incorporated in Delaware in 2003 in preparation for an initial public offering (“IPO”) of Genworth’s common stock, which was completed on May 28, 2004. On April 1, 2013, Genworth Holdings completed a holding company reorganization pursuant to which Genworth Holdings became a direct, 100% owned subsidiary of a new public holding company that it had formed. The new public holding company was incorporated in Delaware on December 5, 2012, in connection with the reorganization, and was renamed Genworth Financial, Inc. (“Genworth Financial”) upon the completion of the reorganization.

On October 21, 2016, Genworth Financial entered into an agreement and plan of merger (the “Merger Agreement”) with Asia Pacific Global Capital Co., Ltd. (“the Parent”), a limited liability company incorporated in the People’s Republic of China, and Asia Pacific Global Capital USA Corporation (“Merger Sub”), a Delaware corporation and an indirect, wholly-owned subsidiary of the Parent. Subject to the terms and conditions of the Merger Agreement, including the satisfaction or waiver of certain conditions, Merger Sub would merge with and into Genworth Financial with Genworth Financial surviving the merger as an indirect, wholly-owned subsidiary of the Parent. The Parent is a newly formed subsidiary of China Oceanwide Holdings Group Co., Ltd. (together with its affiliates, “China Oceanwide”). China Oceanwide has agreed to acquire all of our outstanding common stock for a total transaction value of approximately $2.7 billion, or $5.43 per share in cash. At a special meeting held on March 7, 2017, Genworth’s stockholders voted on and approved a proposal to adopt the Merger Agreement. The transaction remains subject to closing conditions, including the receipt of required regulatory approvals in the U.S., China, and other international jurisdictions. Both parties are engaging with the relevant regulators regarding the applications and the pending transaction. Genworth and China Oceanwide continue to target closing the transaction in the middle of 2017.

The accompanying unaudited condensed financial statements include on a consolidated basis the accounts of Genworth Financial and the affiliate companies in which it holds a majority voting interest or where it is the primary beneficiary of a variable interest entity (“VIE”). All intercompany accounts and transactions have been eliminated in consolidation.

References to “Genworth,” the “Company,” “we” or “our” in the accompanying unaudited condensed consolidated financial statements and these notes thereto are, unless the context otherwise requires, to Genworth Financial on a consolidated basis.

We operate our business through the following five operating segments:

 

    U.S. Mortgage Insurance. In the United States, we offer mortgage insurance products predominantly insuring prime-based, individually underwritten residential mortgage loans (“flow mortgage insurance”). We selectively provide mortgage insurance on a bulk basis (“bulk mortgage insurance”) with essentially all of our bulk writings being prime-based.

 

    Canada Mortgage Insurance. We offer flow mortgage insurance and also provide bulk mortgage insurance that aids in the sale of mortgages to the capital markets and helps lenders manage capital and risk in Canada.

 

    Australia Mortgage Insurance. In Australia, we offer flow mortgage insurance and selectively provide bulk mortgage insurance that aids in the sale of mortgages to the capital markets and helps lenders manage capital and risk.

 

    U.S. Life Insurance. We offer long-term care insurance products as well as service traditional life insurance and fixed annuity products in the United States.

 

    Runoff. The Runoff segment includes the results of non-strategic products which have not been actively sold but we continue to service our existing blocks of business. Our non-strategic products primarily include our variable annuity, variable life insurance, institutional, corporate-owned life insurance and other accident and health insurance products. Institutional products consist of: funding agreements, funding agreements backing notes and guaranteed investment contracts.

In addition to our five operating business segments, we also have Corporate and Other activities which include debt financing expenses that are incurred at the Genworth Holdings level, unallocated corporate income and expenses, eliminations of inter-segment transactions and the results of other businesses that are managed outside of our operating segments, including certain smaller international mortgage insurance businesses and discontinued operations.

The accompanying condensed consolidated financial statements are unaudited and have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) and rules and regulations of the U.S. Securities and Exchange Commission (“SEC”). Preparing financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions that affect reported amounts and related disclosures. Actual results could differ from those estimates. These unaudited condensed consolidated financial statements include all adjustments (including normal recurring adjustments) considered necessary by management to present a fair statement of the financial position, results of operations and cash flows for the periods presented. The results reported in these unaudited condensed consolidated financial statements should not be regarded as necessarily indicative of results that may be expected for the entire year. The unaudited condensed consolidated financial statements included herein should be read in conjunction with the audited consolidated financial statements and related notes contained in our 2016 Annual Report on Form 10-K. Certain prior year amounts have been reclassified to conform to the current year presentation.

Accounting Changes
Accounting Changes

(2) Accounting Changes

Accounting Pronouncements Recently Adopted

On January 1, 2017, we adopted new accounting guidance related to the accounting for stock compensation. The guidance primarily simplifies the accounting for employee share-based payment transactions, including a new requirement to record all of the income tax effects at settlement or expiration through the income statement, classifications of awards as either equity or liabilities, and classification on the statement of cash flows. We adopted this new accounting guidance on a modified retrospective basis and recorded a previously disallowed deferred tax asset of $9 million with a corresponding increase to cumulative effect of change in accounting within retained earnings at adoption.

On January 1, 2017, we adopted new accounting guidance related to transition to the equity method of accounting. The guidance eliminates the retrospective application of the equity method of accounting when obtaining significant influence over a previously held investment. The guidance requires that an entity that has an available-for-sale equity security that becomes qualified for the equity method of accounting recognize through earnings the unrealized holding gain or loss in accumulated other comprehensive income at the date the investment becomes qualified for use of the equity method. We did not have any significant impact from this guidance on our consolidated financial statements.

 

On January 1, 2017, we adopted new accounting guidance related to the assessment of contingent put and call options in debt instruments. The guidance clarifies the requirements for assessing whether contingent call (put) options that can accelerate the payment of principal on debt instruments are clearly and closely related to their debt hosts. An entity performing the assessment under the amendments in this update is required to assess the embedded call (put) options solely in accordance with the four-step decision sequence. This guidance is consistent with our previous accounting practices and, accordingly, did not have any impact on our consolidated financial statements.

On January 1, 2017, we adopted new accounting guidance related to the effect of derivative contract novations on existing hedge accounting relationships. The guidance clarifies that a change in the counterparty to a derivative instrument that has been designated as the hedging instrument does not, in and of itself, require dedesignation of that hedging relationship provided that all other hedge accounting criteria continue to be met. This guidance is consistent with our previous accounting for derivative contract novations and, accordingly, did not have any impact on our consolidated financial statements.

Accounting Pronouncements Not Yet Adopted

In March 2017, the Financial Accounting Standards Board (“the FASB”) issued new guidance shortening the amortization period for the premium component of callable debt securities purchased at a premium. The guidance requires the premium to be amortized to the earliest call date. This change does not apply to securities held at a discount. The guidance is currently effective for us on January 1, 2019, with early adoption permitted. We are in process of evaluating the impact the guidance may have on our consolidated financial statements.

In February 2017, the FASB issued new guidance to clarify the accounting for gains and losses from the derecognition of nonfinancial assets and accounting for partial sales of nonfinancial assets. The new guidance clarifies when transferring ownership interests in a consolidated subsidiary holding nonfinancial assets is within scope. It also states that the reporting entity should identify each distinct nonfinancial asset and derecognize when a counterparty obtains control, and clarifies the accounting for partial sales. The new guidance is currently effective for us on January 1, 2018. We do not expect any significant impacts from this guidance on our consolidated financial statements.

In January 2017, the FASB issued new guidance simplifying the test for goodwill impairment. The new guidance states goodwill impairment is equal to the difference between the carrying value and fair value of the reporting unit up to the amount of recorded goodwill. The new guidance is currently effective for us on January 1, 2020, with early adoption permitted for testing dates after January 1, 2017. We do not expect any significant impacts from this new guidance on our consolidated financial statements.

In October 2016, the FASB issued new guidance related to the income tax effects of intra-entity transfers of assets other than inventory. The new guidance states that an entity should recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. The guidance is currently effective for us on January 1, 2018. We are still in process of evaluating the impact the guidance may have on our consolidated financial statements, including any cumulative effect adjustment that will be recorded directly to retained earnings as of the beginning of the period of adoption.

Earnings Per Share
Earnings Per Share

(3) Earnings Per Share

Basic and diluted earnings per share are calculated by dividing each income (loss) category presented below by the weighted-average basic and diluted common shares outstanding for the periods indicated:

 

     Three months ended
March 31,
 

(Amounts in millions, except per share amounts)

   2017      2016  

Weighted-average shares used in basic earnings per share calculations

     498.6      498.0

Potentially dilutive securities:

     

Stock options, restricted stock units and stock appreciation rights

     2.4      1.4
  

 

 

    

 

 

 

Weighted-average shares used in diluted earnings per share calculations

     501.0      499.4
  

 

 

    

 

 

 

Income from continuing operations:

     

Income from continuing operations

   $ 216    $ 127

Less: income from continuing operations attributable to noncontrolling interests

     61      55
  

 

 

    

 

 

 

Income from continuing operations available to Genworth Financial, Inc.’s common stockholders

   $ 155    $ 72
  

 

 

    

 

 

 

Basic per share

   $ 0.31    $ 0.14
  

 

 

    

 

 

 

Diluted per share

   $ 0.31    $ 0.14
  

 

 

    

 

 

 

Loss from discontinued operations:

     

Loss from discontinued operations, net of taxes

   $ —      $ (19

Less: income from discontinued operations, net of taxes, attributable to noncontrolling interests

     —        —  
  

 

 

    

 

 

 

Loss from discontinued operations, net of taxes, available to Genworth Financial, Inc.'s common stockholders

   $ —      $ (19
  

 

 

    

 

 

 

Basic per share

   $ —      $ (0.04
  

 

 

    

 

 

 

Diluted per share

   $ —      $ (0.04
  

 

 

    

 

 

 

Net income:

     

Income from continuing operations

   $ 216    $ 127

Loss from discontinued operations, net of taxes

     —        (19
  

 

 

    

 

 

 

Net income

     216      108

Less: net income attributable to noncontrolling interests

     61      55
  

 

 

    

 

 

 

Net income available to Genworth Financial, Inc.’s common stockholders

   $ 155    $ 53
  

 

 

    

 

 

 

Basic per share

   $ 0.31    $ 0.11
  

 

 

    

 

 

 

Diluted per share

   $ 0.31    $ 0.11
  

 

 

    

 

 

 

 

 

Investments
Investments

(4) Investments

(a) Net Investment Income

Sources of net investment income were as follows for the periods indicated:

 

     Three months ended
March 31,
 

(Amounts in millions)

       2017              2016      

Fixed maturity securities—taxable

   $ 641    $ 641

Fixed maturity securities—non-taxable

     3      3

Commercial mortgage loans

     77      81

Restricted commercial mortgage loans related to securitization entities

     2      2

Equity securities

     8      5

Other invested assets

     32      38

Restricted other invested assets related to securitization entities

     —        2

Policy loans

     42      35

Cash, cash equivalents and short-term investments

     6      5
  

 

 

    

 

 

 

Gross investment income before expenses and fees

     811      812

Expenses and fees

     (21      (23
  

 

 

    

 

 

 

Net investment income

   $ 790    $ 789
  

 

 

    

 

 

 

(b) Net Investment Gains (Losses)

The following table sets forth net investment gains (losses) for the periods indicated:

 

     Three months ended
March 31,
 

(Amounts in millions)

       2017              2016      

Available-for-sale securities:

     

Realized gains

   $ 63    $ 16

Realized losses

     (34      (23
  

 

 

    

 

 

 

Net realized gains (losses) on available-for-sale securities

     29      (7
  

 

 

    

 

 

 

Impairments:

     

Total other-than-temporary impairments

     (1      (11

Portion of other-than-temporary impairments included in other comprehensive income

     —        —  
  

 

 

    

 

 

 

Net other-than-temporary impairments

     (1      (11
  

 

 

    

 

 

 

Trading securities

     —        28

Commercial mortgage loans

     1      1

Net gains (losses) related to securitization entities

     2      8

Derivative instruments (1)

     3      (38
  

 

 

    

 

 

 

Net investment gains (losses)

   $ 34    $ (19
  

 

 

    

 

 

 

 

(1)  See note 5 for additional information on the impact of derivative instruments included in net investment gains (losses).

 

We generally intend to hold securities in unrealized loss positions until they recover. However, from time to time, our intent on an individual security may change, based upon market or other unforeseen developments. In such instances, we sell securities in the ordinary course of managing our portfolio to meet diversification, credit quality, yield and liquidity requirements. If a loss is recognized from a sale subsequent to a balance sheet date due to these unexpected developments, the loss is recognized in the period in which we determined that we have the intent to sell the securities or it is more likely than not that we will be required to sell the securities prior to recovery. The aggregate fair value of securities sold at a loss during the three months ended March 31, 2017 and 2016 was $876 million and $240 million, respectively, which was approximately 96% and 91%, respectively, of book value.

The following represents the activity for credit losses recognized in net income on debt securities where an other-than-temporary impairment was identified and a portion of other-than-temporary impairments was included in other comprehensive income (“OCI”) as of and for the three months ended March 31:

 

(Amounts in millions)

   2017      2016  

Beginning balance

   $ 42    $ 64

Reductions:

     

Securities sold, paid down or disposed

     (1      (1
  

 

 

    

 

 

 

Ending balance

   $ 41    $ 63
  

 

 

    

 

 

 

(c) Unrealized Investment Gains and Losses

Net unrealized gains and losses on available-for-sale investment securities reflected as a separate component of accumulated other comprehensive income were as follows as of the dates indicated:

 

(Amounts in millions)

   March 31, 2017      December 31, 2016  

Net unrealized gains (losses) on investment securities:

     

Fixed maturity securities

   $ 3,983    $ 3,656

Equity securities

     49      12
  

 

 

    

 

 

 

Subtotal (1)

     4,032      3,668

Adjustments to deferred acquisition costs, present value of future profits, sales inducements and benefit reserves

     (1,994      (1,611

Income taxes, net

     (703      (711
  

 

 

    

 

 

 

Net unrealized investment gains (losses)

     1,335      1,346

Less: net unrealized investment gains (losses) attributable to noncontrolling interests

     92      84
  

 

 

    

 

 

 

Net unrealized investment gains (losses) attributable to Genworth Financial, Inc.

   $ 1,243    $ 1,262
  

 

 

    

 

 

 

 

(1)  Excludes foreign exchange.

 

The change in net unrealized gains (losses) on available-for-sale investment securities reported in accumulated other comprehensive income was as follows as of and for the three months ended March 31:

 

(Amounts in millions)

   2017      2016  

Beginning balance

   $ 1,262    $ 1,254

Unrealized gains (losses) arising during the period:

     

Unrealized gains (losses) on investment securities

     392      1,596

Adjustment to deferred acquisition costs

     (305      (142

Adjustment to present value of future profits

     (5      (34

Adjustment to sales inducements

     (5      (19

Adjustment to benefit reserves

     (68      (174

Provision for income taxes

     (2      (436
  

 

 

    

 

 

 

Change in unrealized gains (losses) on investment securities

     7      791

Reclassification adjustments to net investment (gains) losses, net of taxes of $10 and $(6)

     (18      12
  

 

 

    

 

 

 

Change in net unrealized investment gains (losses)

     (11      803

Less: change in net unrealized investment gains (losses) attributable to noncontrolling interests

     8      —  
  

 

 

    

 

 

 

Ending balance

   $ 1,243    $ 2,057
  

 

 

    

 

 

 

 

(d) Fixed Maturity and Equity Securities

As of March 31, 2017, the amortized cost or cost, gross unrealized gains (losses) and fair value of our fixed maturity and equity securities classified as available-for-sale were as follows:

 

            Gross unrealized gains      Gross unrealized losses         

(Amounts in millions)

   Amortized
cost or
cost
     Not other-than-
temporarily
impaired
     Other-than-
temporarily
impaired
     Not other-than-
temporarily
impaired
    Other-than-
temporarily
impaired
     Fair
value
 

Fixed maturity securities:

                

U.S. government, agencies and government-sponsored enterprises

   $ 4,837    $ 681    $ —        $ (25   $ —        $ 5,493

State and political subdivisions

     2,565      191      —        (46     —        2,710

Non-U.S. government

     1,722      106      —        (11     —        1,817

U.S. corporate:

                

Utilities

     4,215      456      —        (36     —        4,635

Energy

     2,192      166      —        (19     —        2,339

Finance and insurance

     5,882      465      —        (31     —        6,316

Consumer—non-cyclical

     4,380      441      —        (28     —        4,793

Technology and communications

     2,520      150      —        (27     —        2,643

Industrial

     1,223      86      —        (9     —        1,300

Capital goods

     2,085      236      —        (12     —        2,309

Consumer—cyclical

     1,480      96      —        (14     —        1,562

Transportation

     1,105      86      —        (14     —        1,177

Other

     331      19      —        (1     —        349
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Total U.S. corporate

     25,413      2,201      —        (191     —        27,423
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Non-U.S. corporate:

                

Utilities

     985      44      —        (9     —        1,020

Energy

     1,281      122      —        (8     —        1,395

Finance and insurance

     2,445      151      —        (7     —        2,589

Consumer—non-cyclical

     701      20      —        (9     —        712

Technology and communications

     968      50      —        (6     —        1,012

Industrial

     924      56      —        (4     —        976

Capital goods

     563      25      —        (3     —        585

Consumer—cyclical

     451      11      —        (1     —        461

Transportation

     632      67      —        (6     —        693

Other

     2,600      187      —        (6     —        2,781
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Total non-U.S. corporate

     11,550      733      —        (59     —        12,224
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Residential mortgage-backed

     4,139      264      12      (11     —        4,404

Commercial mortgage-backed

     3,250      97      4      (49     —        3,302

Other asset-backed

     3,231      15      1      (23     —        3,224
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Total fixed maturity securities

     56,707      4,288      17      (415     —        60,597

Equity securities

     667      55      —        (13     —        709
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Total available-for-sale securities

   $ 57,374    $ 4,343    $ 17    $ (428   $ —        $ 61,306
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

As of December 31, 2016, the amortized cost or cost, gross unrealized gains (losses) and fair value of our fixed maturity and equity securities classified as available-for-sale were as follows:

 

            Gross unrealized gains      Gross unrealized losses         

(Amounts in millions)

   Amortized
cost or
cost
     Not other-than-
temporarily
impaired
     Other-than-
temporarily
impaired
     Not other-than-
temporarily
impaired
    Other-than-
temporarily
impaired
     Fair
value
 

Fixed maturity securities:

                

U.S. government, agencies and government-sponsored enterprises

   $ 5,439    $ 647    $ —      $ (50   $ —      $ 6,036

State and political subdivisions

     2,515      182      —        (50     —        2,647

Non-U.S. government

     2,024      101      —        (18     —        2,107

U.S. corporate:

                

Utilities

     4,137      454      —        (41     —        4,550

Energy

     2,167      157      —        (24     —        2,300

Finance and insurance

     5,719      424      —        (46     —        6,097

Consumer—non-cyclical

     4,335      433      —        (34     —        4,734

Technology and communications

     2,473      157      —        (32     —        2,598

Industrial

     1,161      76      —        (14     —        1,223

Capital goods

     2,043      228      —        (13     —        2,258

Consumer—cyclical

     1,455      92      —        (17     —        1,530

Transportation

     1,121      86      —        (17     —        1,190

Other

     332      17      —        (1     —        348
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Total U.S. corporate

     24,943      2,124      —        (239     —        26,828
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Non-U.S. corporate:

                

Utilities

     940      40      —        (11     —        969

Energy

     1,234      109      —        (12     —        1,331

Finance and insurance

     2,413      134      —        (9     —        2,538

Consumer—non-cyclical

     711      17      —        (14     —        714

Technology and communications

     953      44      —        (10     —        987

Industrial

     928      39      —        (9     —        958

Capital goods

     518      21      —        (4     —        535

Consumer—cyclical

     434      10      —        (2     —        442

Transportation

     619      65      —        (7     —        677

Other

     2,967      190      —        (13     —        3,144
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Total non-U.S. corporate

     11,717      669      —        (91     —        12,295
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Residential mortgage-backed

     4,122      259      10      (12     —        4,379

Commercial mortgage-backed

     3,084      98      3      (56     —        3,129

Other asset-backed

     3,170      15      1      (35     —        3,151
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Total fixed maturity securities

     57,014      4,095      14      (551     —        60,572

Equity securities

     628      31      —        (27     —        632
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Total available-for-sale securities

   $ 57,642    $ 4,126    $ 14    $ (578   $ —      $ 61,204
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

 

The following table presents the gross unrealized losses and fair values of our investment securities, aggregated by investment type and length of time that individual investment securities have been in a continuous unrealized loss position, as of March 31, 2017:

 

    Less than 12 months     12 months or more     Total  

(Dollar amounts in millions)

  Fair
value
    Gross
unrealized
losses
    Number
of
securities
    Fair
value
    Gross
unrealized
losses
    Number
of
securities
    Fair
value
    Gross
unrealized
losses
    Number
of
securities
 

Description of Securities

                 

Fixed maturity securities:

                 

U.S. government, agencies and government-sponsored enterprises

  $ 861   $ (25     41   $ —     $ —         —     $ 861   $ (25     41

State and political subdivisions

    564     (28     96     142     (18     12     706     (46     108

Non-U.S. government

    345     (11     35     —       —         —       345     (11     35

U.S. corporate

    4,601     (155     630     509     (36     68     5,110     (191     698

Non-U.S. corporate

    1,493     (41     221     298     (18     41     1,791     (59     262

Residential mortgage-backed

    675     (10     104     56     (1     31     731     (11     135

Commercial mortgage-backed

    1,067     (48     153     16     (1     7     1,083     (49     160

Other asset-backed

    847     (6     150     344     (17     67     1,191     (23     217
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Subtotal, fixed maturity securities

    10,453     (324     1,430     1,365     (91     226     11,818     (415     1,656

Equity securities

    86     (5     160     105     (8     48     191     (13     208
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total for securities in an unrealized loss position

  $ 10,539   $ (329     1,590   $ 1,470   $ (99     274   $ 12,009   $ (428     1,864
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

% Below cost—fixed maturity securities:

                 

<20% Below cost

  $ 10,453   $ (324     1,430   $ 1,325   $ (78     220   $ 11,778   $ (402     1,650

20%-50% Below cost

    —       —       —       40     (13     6     40     (13     6
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total fixed maturity securities

    10,453     (324     1,430     1,365     (91     226     11,818     (415     1,656
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

% Below cost—equity securities:

                 

<20% Below cost

    83     (4     151     105     (8     48     188     (12     199

20%-50% Below cost

    3     (1     9     —       —         —       3     (1     9
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total equity securities

    86     (5     160     105     (8     48     191     (13     208
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total for securities in an unrealized loss position

  $ 10,539   $ (329     1,590   $ 1,470   $ (99     274   $ 12,009   $ (428     1,864
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Investment grade

  $ 10,163   $ (318     1,390   $ 1,172   $ (79     216   $ 11,335   $ (397     1,606

Below investment grade

    376     (11     200     298     (20     58     674     (31     258
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total for securities in an unrealized loss position

  $ 10,539   $ (329     1,590   $ 1,470   $ (99     274   $ 12,009   $ (428     1,864
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

The following table presents the gross unrealized losses and fair values of our corporate securities, aggregated by investment type and length of time that individual investment securities have been in a continuous unrealized loss position, based on industry, as of March 31, 2017:

 

    Less than 12 months     12 months or more     Total  

(Dollar amounts in millions)

  Fair
value
    Gross
unrealized
losses
    Number of
securities
    Fair
value
    Gross
unrealized
losses
    Number of
securities
    Fair
value
    Gross
unrealized
losses
    Number of
securities
 

Description of Securities

                 

U.S. corporate:

                 

Utilities

  $ 784   $ (35     118   $ 21   $ (1     4   $ 805   $ (36     122

Energy

    253     (5     37     204     (14     25     457     (19     62

Finance and insurance

    1,140     (25     151     99     (6     14     1,239     (31     165

Consumer—non-cyclical

    825     (28     105     —       —       —       825     (28     105

Technology and communications

    450     (19     62     89     (8     13     539     (27     75

Industrial

    181     (5     27     46     (4     5     227     (9     32

Capital goods

    321     (11     48     6     (1     1     327     (12     49

Consumer—cyclical

    335     (12     43     31     (2     5     366     (14     48

Transportation

    295     (14     37     13     —       1     308     (14     38

Other

    17     (1     2     —       —       —       17     (1     2
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Subtotal, U.S. corporate securities

    4,601     (155     630     509     (36     68     5,110     (191     698
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Non-U.S. corporate:

                 

Utilities

    232     (8     23     14     (1     1     246     (9     24

Energy

    84     (2     17     83     (6     14     167     (8     31

Finance and insurance

    265     (5     44     27     (2     7     292     (7     51

Consumer—non-cyclical

    238     (9     24     —       —       —       238     (9     24

Technology and communications

    197     (5     27     18     (1     1     215     (6     28

Industrial

    91     (2     12     46     (2     6     137     (4     18

Capital goods

    66     (1     10     28     (2     2     94     (3     12

Consumer—cyclical

    60     (1     14     —       —       —       60     (1     14

Transportation

    95     (5     15     25     (1     2     120     (6     17

Other

    165     (3     35     57     (3     8     222     (6     43
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Subtotal, non-U.S. corporate securities

    1,493     (41     221     298     (18     41     1,791     (59     262
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total for corporate securities in an unrealized loss position

  $ 6,094   $ (196     851   $ 807   $ (54     109   $ 6,901   $ (250     960
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

As indicated in the tables above, the majority of the securities in a continuous unrealized loss position for less than 12 months were investment grade and less than 20% below cost. These unrealized losses were primarily attributable to increased market volatility, mostly concentrated in our corporate securities. For securities that have been in a continuous unrealized loss position for less than 12 months, the average fair value percentage below cost was approximately 3% as of March 31, 2017.

 

Fixed Maturity Securities In A Continuous Unrealized Loss Position For 12 Months Or More

Of the $78 million of unrealized losses on fixed maturity securities in a continuous unrealized loss for 12 months or more that were less than 20% below cost, the weighted-average rating was “BBB” and approximately 77% of the unrealized losses were related to investment grade securities as of March 31, 2017. These unrealized losses were predominantly attributable to corporate securities including variable rate securities purchased in a higher rate and lower spread environment. The average fair value percentage below cost for these securities was approximately 5% as of March 31, 2017. See below for additional discussion related to fixed maturity securities that have been in a continuous unrealized loss position for 12 months or more with a fair value that was more than 20% below cost.

The following tables present the concentration of gross unrealized losses and fair values of fixed maturity securities that were more than 20% below cost and in a continuous unrealized loss position for 12 months or more by asset class as of March 31, 2017:

 

    Investment Grade  
    20% to 50%     Greater than 50%  

(Dollar amounts in millions)

  Fair
value
    Gross
unrealized
losses
    % of total
gross
unrealized
losses
    Number of
securities
    Fair
value
    Gross
unrealized
losses
    % of total
gross
unrealized
losses
    Number of
securities
 

Fixed maturity securities:

               

State and political subdivisions

  $ 9   $ (3     1     1   $ —     $ —       —       —  

Structured securities:

               

Other asset-backed

    29     (9     2     4     —       —       —       —  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total structured securities

    29     (9     2     4     —       —       —       —  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 38   $ (12     3     5   $ —     $ —       —       —  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    Below Investment Grade  
    20% to 50%     Greater than 50%  

(Dollar amounts in millions)

  Fair
value
    Gross
unrealized
losses
    % of total
gross
unrealized
losses
    Number of
securities
    Fair
value
    Gross
unrealized
losses
    % of total
gross
unrealized
losses
    Number of
securities
 

Fixed maturity securities:

               

Non-U.S. government

  $ 2   $ (1     —       1   $ —     $ —       —       —  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 2   $ (1     —       1   $ —     $ —       —       —  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

For all securities in an unrealized loss position, we expect to recover the amortized cost based on our estimate of the amount and timing of cash flows to be collected. We do not intend to sell nor do we expect that we will be required to sell these securities prior to recovering our amortized cost. See below for further discussion of gross unrealized losses by asset class.

 

Structured Securities

Of the $9 million of unrealized losses related to structured securities that have been in an unrealized loss position for 12 months or more and were more than 20% below cost, none related to other-than-temporarily impaired securities where the unrealized losses represented the portion of the other-than-temporary impairment recognized in OCI. The extent and duration of the unrealized loss position on our structured securities was primarily due to credit spreads that have widened since acquisition. Additionally, the fair value of certain structured securities has been impacted from high risk premiums being incorporated into the valuation as a result of the amount of potential losses that may be absorbed by the security in the event of additional deterioration in the U.S. economy.

While we consider the length of time each security had been in an unrealized loss position, the extent of the unrealized loss position and any significant declines in fair value subsequent to the balance sheet date in our evaluation of impairment for each of these individual securities, the primary factor in our evaluation of impairment is the expected performance for each of these securities. Our evaluation of expected performance is based on the historical performance of the associated securitization trust as well as the historical performance of the underlying collateral. Our examination of the historical performance of the securitization trust included consideration of the following factors for each class of securities issued by the trust: (i) the payment history, including failure to make scheduled payments; (ii) current payment status; (iii) current and historical outstanding balances; (iv) current levels of subordination and losses incurred to date; and (v) characteristics of the underlying collateral. Our examination of the historical performance of the underlying collateral included: (i) historical default rates, delinquency rates, voluntary and involuntary prepayments and severity of losses, including recent trends in this information; (ii) current payment status; (iii) loan to collateral value ratios, as applicable; (iv) vintage; and (v) other underlying characteristics such as current financial condition.

We use our assessment of the historical performance of both the securitization trust and the underlying collateral for each security, along with third-party sources, when available, to develop our best estimate of cash flows expected to be collected. These estimates reflect projections for future delinquencies, prepayments, defaults and losses for the assets that collateralize the securitization trust and are used to determine the expected cash flows for our security, based on the payment structure of the trust. Our projection of expected cash flows is primarily based on the expected performance of the underlying assets that collateralize the securitization trust and is not directly impacted by the rating of our security. While we consider the rating of the security as an indicator of the financial condition of the issuer, this factor does not have a significant impact on our expected cash flows for each security. In limited circumstances, our expected cash flows include expected payments from reliable financial guarantors where we believe the financial guarantor will have sufficient assets to pay claims under the financial guarantee when the cash flows from the securitization trust are not sufficient to make scheduled payments. We then discount the expected cash flows using the effective yield of each security to determine the present value of expected cash flows.

Based on this evaluation, the present value of expected cash flows was greater than or equal to the amortized cost for each security. Accordingly, we determined that the unrealized losses on each of our structured securities represented temporary impairments as of March 31, 2017.

Despite the considerable analysis and rigor employed on our structured securities, it is reasonably possible that the underlying collateral of these investments may perform worse than current market expectations. Such events may lead to adverse changes in cash flows on our holdings of structured securities and future write-downs within our portfolio of structured securities.

 

State and political subdivisions

As indicated above, $3 million of gross unrealized losses were related to a state and political subdivisions fixed maturity security that has been in a continuous loss position for more than 12 months and was greater than 20% below cost. The unrealized loss for this security was 24% below cost, primarily related to widening of credit spreads since acquisition as a result of higher risk premiums being attributed to this security from uncertainty related to special revenues supporting this type of obligation as well as certain securities having longer duration that may be viewed as less desirable in the current market place. Additionally, the fair value of this security class has been negatively impacted as a result of having certain bond insurers associated with the security. In our analysis of impairment for this security, we expect to recover our amortized cost from the cash flows of the underlying security before any guarantee support. However, the existence of these guarantees may negatively impact the value of the debt security in certain instances. We performed an analysis of this security and the underlying activities that are expected to support the cash flows and determined we expect to recover our amortized cost.

 

The following table presents the gross unrealized losses and fair values of our investment securities, aggregated by investment type and length of time that individual investment securities have been in a continuous unrealized loss position, as of December 31, 2016:

 

    Less than 12 months     12 months or more     Total  

(Dollar amounts in millions)

  Fair
value
    Gross
unrealized
losses
    Number of
securities
    Fair
value
    Gross
unrealized
losses
    Number of
securities
    Fair
value
    Gross
unrealized
losses
    Number of
securities
 

Description of Securities

                 

Fixed maturity securities:

                 

U.S. government, agencies and government-sponsored enterprises

  $ 1,074   $ (50     37   $ —     $ —         —     $ 1,074   $ (50     37

State and political subdivisions

    644     (32     109     142     (18     12     786     (50     121

Non-U.S. government

    497     (18     51     —       —         —       497     (18     51

U.S. corporate

    5,221     (190     711     662     (49     94     5,883     (239     805

Non-U.S. corporate

    2,257     (66     330     408     (25     57     2,665     (91     387

Residential mortgage-backed

    725     (11     100     58     (1     35     783     (12     135

Commercial mortgage-backed

    1,091     (55     168     25     (1     9     1,116     (56     177

Other asset-backed

    1,069     (13     184     328     (22     68     1,397     (35     252
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Subtotal, fixed maturity securities

    12,578     (435     1,690     1,623     (116     275     14,201     (551     1,965

Equity securities

    119     (9     182     114     (18     47     233     (27     229
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total for securities in an unrealized loss position

  $ 12,697   $ (444     1,872   $ 1,737   $ (134     322   $ 14,434   $ (578     2,194
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

% Below cost—fixed maturity securities:

                 

<20% Below cost

  $ 12,578   $ (435     1,690   $ 1,543   $ (90     267   $ 14,121   $ (525     1,957

20%-50% Below cost

    —       —       —       80     (26     8     80     (26     8

>50% Below cost

    —       —       —       —       —         —       —       —         —  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total fixed maturity securities

    12,578     (435     1,690     1,623     (116     275     14,201     (551     1,965
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

% Below cost—equity securities:

                 

<20% Below cost

    118     (8     167     101     (14     38     219     (22     205

20%-50% Below cost

    1     (1     15     13     (4     9     14     (5     24
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total equity securities

    119     (9     182     114     (18     47     233     (27     229
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total for securities in an unrealized loss position

  $ 12,697   $ (444     1,872   $ 1,737   $ (134     322   $ 14,434   $ (578     2,194
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Investment grade

  $ 12,339   $ (432     1,657   $ 1,354   $ (108     250   $ 13,693   $ (540     1,907

Below investment grade

    358     (12     215     383     (26     72     741     (38     287
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total for securities in an unrealized loss position

  $ 12,697   $ (444     1,872   $ 1,737   $ (134     322   $ 14,434   $ (578     2,194
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

The following table presents the gross unrealized losses and fair values of our corporate securities, aggregated by investment type and length of time that individual investment securities have been in a continuous unrealized loss position, based on industry, as of December 31, 2016:

 

    Less than 12 months     12 months or more     Total  

(Dollar amounts in millions)

  Fair
value
    Gross
unrealized
losses
    Number
of
securities
    Fair
value
    Gross
unrealized
losses
    Number
of
securities
    Fair
value
    Gross
unrealized
losses
    Number
of
securities
 

Description of Securities

                 

U.S. corporate:

                 

Utilities

  $ 855   $ (39     130   $ 21   $ (2     5   $ 876   $ (41     135

Energy

    190     (5     30     276     (19     38     466     (24     68

Finance and insurance

    1,438     (38     177     113     (8     15     1,551     (46     192

Consumer—non-cyclical

    921     (34     117     —       —       —       921     (34     117

Technology and communications

    507     (22     70     126     (10     17     633     (32     87

Industrial

    226     (7     38     77     (7     10     303     (14     48

Capital goods

    322     (12     50     6     (1     1     328     (13     51

Consumer—cyclical

    431     (16     56     26     (1     6     457     (17     62

Transportation

    302     (16     41     17     (1     2     319     (17     43

Other

    29     (1     2     —       —       —       29     (1     2
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Subtotal, U.S. corporate securities

    5,221     (190     711     662     (49     94     5,883     (239     805
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Non-U.S. corporate:

                 

Utilities

    240     (10     32     14     (1     1     254     (11     33

Energy

    105     (3     18     91     (9     16     196     (12     34

Finance and insurance

    474     (8     79     71     (1     16     545     (9     95

Consumer—non-cyclical

    308     (14     30     —       —       —       308     (14     30

Technology and communications

    232     (9     34     28     (1     2     260     (10     36

Industrial

    165     (5     21     91     (4     10     256     (9     31

Capital goods

    104     (2     14     28     (2     2     132     (4     16

Consumer—cyclical

    90     (2     17     —       —       —       90     (2     17

Transportation

    106     (5     16     25     (2     2     131     (7     18

Other

    433     (8     69     60     (5     8     493     (13     77
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Subtotal, non-U.S. corporate securities

    2,257     (66     330     408     (25     57     2,665     (91     387
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total for corporate securities in an unrealized loss position

  $ 7,478   $ (256     1,041   $ 1,070   $ (74     151   $ 8,548   $ (330     1,192
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

The scheduled maturity distribution of fixed maturity securities as of March 31, 2017 is set forth below. Actual maturities may differ from contractual maturities because issuers of securities may have the right to call or prepay obligations with or without call or prepayment penalties.

 

(Amounts in millions)

   Amortized
cost or
cost
     Fair
value
 

Due one year or less

   $ 1,755    $ 1,776

Due after one year through five years

     10,322      10,764

Due after five years through ten years

     11,969      12,386

Due after ten years

     22,041      24,741
  

 

 

    

 

 

 

Subtotal

     46,087      49,667

Residential mortgage-backed

     4,139      4,404

Commercial mortgage-backed

     3,250      3,302

Other asset-backed

     3,231      3,224
  

 

 

    

 

 

 

Total

   $ 56,707    $ 60,597
  

 

 

    

 

 

 

As of March 31, 2017, $10,978 million of our investments (excluding mortgage-backed and asset-backed securities) were subject to certain call provisions.

As of March 31, 2017, securities issued by finance and insurance, utilities and consumer—non-cyclical industry groups represented approximately 23%, 14% and 14%, respectively, of our domestic and foreign corporate fixed maturity securities portfolio. No other industry group comprised more than 10% of our investment portfolio.

As of March 31, 2017, we did not hold any fixed maturity securities in any single issuer, other than securities issued or guaranteed by the U.S. government, which exceeded 10% of stockholders’ equity.

(e) Commercial Mortgage Loans

Our mortgage loans are collateralized by commercial properties, including multi-family residential buildings. The carrying value of commercial mortgage loans is stated at original cost net of principal payments, amortization and allowance for loan losses.

 

We diversify our commercial mortgage loans by both property type and geographic region. The following tables set forth the distribution across property type and geographic region for commercial mortgage loans as of the dates indicated:

 

     March 31, 2017     December 31, 2016  

(Amounts in millions)

   Carrying
value
     % of
total
    Carrying
value
     % of
total
 

Property type:

          

Retail

   $ 2,181      36   $ 2,178      36

Industrial

     1,531      25     1,533      25

Office

     1,423      23     1,430      23

Apartments

     462      8     455      7

Mixed use

     237      4     245      4

Other

     287      4     284      5
  

 

 

    

 

 

   

 

 

    

 

 

 

Subtotal

     6,121      100     6,125      100
     

 

 

      

 

 

 

Unamortized balance of loan origination fees and costs

     (3        (2   

Allowance for losses

     (11        (12   
  

 

 

      

 

 

    

Total

   $ 6,107      $ 6,111   
  

 

 

      

 

 

    
     March 31, 2017     December 31, 2016  

(Amounts in millions)

   Carrying
value
     % of
total
    Carrying
value
     % of
total
 

Geographic region:

          

South Atlantic

   $ 1,592      26   $ 1,546      25

Pacific

     1,547      25     1,567      27

Middle Atlantic

     895      15     915      15

Mountain

     543      9     554      9

West North Central

     426      7     435      7

East North Central

     390      6     388      6

West South Central

     319      5     311      5

East South Central

     205      4     206      3

New England

     204      3     203      3
  

 

 

    

 

 

   

 

 

    

 

 

 

Subtotal

     6,121      100     6,125      100
     

 

 

      

 

 

 

Unamortized balance of loan origination fees and costs

     (3        (2   

Allowance for losses

     (11        (12   
  

 

 

      

 

 

    

Total

   $ 6,107      $ 6,111   
  

 

 

      

 

 

    

 

The following tables set forth the aging of past due commercial mortgage loans by property type as of the dates indicated:

 

     March 31, 2017  

(Amounts in millions)

   31 - 60 days
past due
    61 - 90 days
past due
    Greater than
90 days past
due
    Total
past due
    Current     Total  

Property type:

            

Retail

   $ —     $ —     $ —     $ —     $ 2,181   $ 2,181

Industrial

     —       —       —       —       1,531     1,531

Office

     —       —       —       —       1,423     1,423

Apartments

     —       —       —       —       462     462

Mixed use

     —       —       —       —       237     237

Other

     —       —       —       —       287     287
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total recorded investment

   $ —     $ —     $ —     $ —     $ 6,121   $ 6,121
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

% of total commercial mortgage loans

     —       —       —       —       100     100
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     December 31, 2016  

(Amounts in millions)

   31 - 60 days
past due
    61 - 90 days
past due
    Greater than
90 days past
due
    Total past
due
    Current     Total  

Property type:

            

Retail

   $ —     $ —     $ —     $ —     $ 2,178   $ 2,178

Industrial

     1     —       12     13     1,520     1,533

Office

     —       —       —       —       1,430     1,430

Apartments

     —       —       —       —       455     455

Mixed use

     —       —       —       —       245     245

Other

     —       —       —       —       284     284
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total recorded investment

   $ 1   $ —     $ 12   $ 13   $ 6,112   $ 6,125
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

% of total commercial mortgage loans

     —       —       —       —       100     100
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

As of March 31, 2017 and December 31, 2016, we had no commercial mortgage loans that were past due for more than 90 days and still accruing interest. We also did not have any commercial mortgage loans that were past due for less than 90 days on non-accrual status as of March 31, 2017 and December 31, 2016.

We evaluate the impairment of commercial mortgage loans on an individual loan basis. As of March 31, 2017, we have no commercial mortgage loans past due and have no loans that are individually impaired.

During the three months ended March 31, 2017 and the year ended December 31, 2016, we modified or extended 2 and 16 commercial mortgage loans, respectively, with a total carrying value of $2 million and $85 million, respectively. All of these modifications or extensions were based on current market interest rates, did not result in any forgiveness in the outstanding principal amount owed by the borrower, except during the year ended December 31, 2016, one loan with a carrying value of $1 million at the time of modification was considered a troubled debt restructuring. This loan was sold in the fourth quarter of 2016.

 

The following table sets forth the allowance for credit losses and recorded investment in commercial mortgage loans as of or for the periods indicated:

 

     Three months
ended March 31,
 

(Amounts in millions)

   2017      2016  

Allowance for credit losses:

     

Beginning balance

   $ 12    $ 15

Charge-offs

     —        —  

Recoveries

     —        —  

Provision

     (1      —  
  

 

 

    

 

 

 

Ending balance

   $ 11    $ 15
  

 

 

    

 

 

 

Ending allowance for individually impaired loans

   $ —      $ —  
  

 

 

    

 

 

 

Ending allowance for loans not individually impaired that were evaluated collectively for impairment

   $ 11    $ 15
  

 

 

    

 

 

 

Recorded investment:

     

Ending balance

   $ 6,121    $ 6,196
  

 

 

    

 

 

 

Ending balance of individually impaired loans

   $ —      $ 19
  

 

 

    

 

 

 

Ending balance of loans not individually impaired that were evaluated collectively for impairment

   $ 6,121    $ 6,177
  

 

 

    

 

 

 

As of March 31, 2017, we had no individually impaired commercial mortgage loans. As of March 31, 2016, we had two individually impaired commercial mortgage loans. One loan was included within the office property type with a recorded investment of $5 million, an unpaid principal balance of $6 million and charge-offs of $1 million. The other loan was included within the industrial property type with a recorded investment of $14 million, an unpaid principal balance of $15 million and charge-offs of $1 million. As of December 31, 2016, we had one individually impaired loan within the industrial property type with a recorded investment of $12 million, an unpaid principal balance of $15 million and charge-offs of $3 million.

In evaluating the credit quality of commercial mortgage loans, we assess the performance of the underlying loans using both quantitative and qualitative criteria. Certain risks associated with commercial mortgage loans can be evaluated by reviewing both the loan-to-value and debt service coverage ratio to understand both the probability of the borrower not being able to make the necessary loan payments as well as the ability to sell the underlying property for an amount that would enable us to recover our unpaid principal balance in the event of default by the borrower. The average loan-to-value ratio is based on our most recent estimate of the fair value for the underlying property which is evaluated at least annually and updated more frequently if necessary to better indicate risk associated with the loan. A lower loan-to-value indicates that our loan value is more likely to be recovered in the event of default by the borrower if the property was sold. The debt service coverage ratio is based on “normalized” annual income of the property compared to the payments required under the terms of the loan. Normalization allows for the removal of annual one-time events such as capital expenditures, prepaid or late real estate tax payments or non-recurring third-party fees (such as legal, consulting or contract fees). This ratio is evaluated at least annually and updated more frequently if necessary to better indicate risk associated with the loan. A higher debt service coverage ratio indicates the borrower is less likely to default on the loan. The debt service coverage ratio should not be used without considering other factors associated with the borrower, such as the borrower’s liquidity or access to other resources that may result in our expectation that the borrower will continue to make the future scheduled payments.

The following tables set forth the loan-to-value of commercial mortgage loans by property type as of the dates indicated:

 

     March 31, 2017  

(Amounts in millions)

   0% - 50%     51% - 60%     61% - 75%     76% - 100%     Greater than
100%
    Total  

Property type:

            

Retail

   $ 722   $ 530   $ 918   $ 11   $ —       $ 2,181

Industrial

     607     428     494     2     —         1,531

Office

     429     312     653     29     —         1,423

Apartments

     189     91     177     5     —         462

Mixed use

     64     86     87     —       —         237

Other

     62     15     210     —       —         287
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total recorded investment

   $ 2,073   $ 1,462   $ 2,539   $ 47   $ —       $ 6,121
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

% of total

     34     24     41     1     —       100
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average debt service coverage ratio

     2.21     1.88     1.61     0.89     —         1.87
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

     December 31, 2016  

(Amounts in millions)

   0% - 50%     51% - 60%     61% - 75%     76% - 100%     Greater than
100% (1)
    Total  

Property type:

            

Retail

   $ 743   $ 511   $ 913   $ 11   $ —       $ 2,178

Industrial

     605     430     484     14     —         1,533

Office

     431     310     656     26     7       1,430

Apartments

     188     89     173     5     —         455

Mixed use

     67     87     91     —       —         245

Other

     60     30     194     —       —         284
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total recorded investment

   $ 2,094   $ 1,457   $ 2,511   $ 56   $ 7     $ 6,125
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

% of total

     34     24     41     1     —       100
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average debt service coverage ratio

     2.20     1.88     1.61     0.80     (0.07     1.87
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)  Included a loan with a recorded investment of $7 million in good standing, where the borrower continued to make timely payments, with a loan-to-value of 105%. We evaluated this loan on an individual basis and as it is in good standing, the current recorded investment is expected to be recoverable.

 

The following tables set forth the debt service coverage ratio for fixed rate commercial mortgage loans by property type as of the dates indicated:

 

     March 31, 2017  

(Amounts in millions)

   Less than
1.00
    1.00 - 1.25     1.26 - 1.50     1.51 - 2.00     Greater
than 2.00
    Total  

Property type:

            

Retail

   $ 61   $ 198   $ 433   $ 915   $ 574   $ 2,181

Industrial

     52     109     237     635     498     1,531

Office

     84     115     175     610     439     1,423

Apartments

     19     21     44     226     152     462

Mixed use

     2     6     19     127     83     237

Other

     1     147     54     65     20     287
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total recorded investment

   $ 219   $ 596   $ 962   $ 2,578   $ 1,766   $ 6,121
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

% of total

     4     10     16     41     29     100
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average loan-to-value

     59     60     59     58     45     55
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     December 31, 2016  

(Amounts in millions)

   Less than
1.00
    1.00 - 1.25     1.26 - 1.50     1.51 - 2.00     Greater
than 2.00
    Total  

Property type:

            

Retail

   $ 67   $ 204   $ 425   $ 899   $ 583   $ 2,178

Industrial

     71     113     236     599     514     1,533

Office

     91     117     172     609     441     1,430

Apartments

     19     22     44     217     153     455

Mixed use

     2     9     19     128     87     245

Other

     1     148     60     55     20     284
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total recorded investment

   $ 251   $ 613   $ 956   $ 2,507   $ 1,798   $ 6,125
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

% of total

     4     10     16     41     29     100
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average loan-to-value

     61     60     59     58     45     55
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

As of March 31, 2017 and December 31, 2016, we did not have any floating rate commercial mortgage loans.

(f) Restricted Commercial Mortgage Loans Related To Securitization Entities

We have a consolidated securitization entity that holds commercial mortgage loans that are recorded as restricted commercial mortgage loans related to securitization entities.

(g) Restricted Other Invested Assets Related To Securitization Entities

We have consolidated securitization entities that hold certain investments that are recorded as restricted other invested assets related to securitization entities. The consolidated securitization entities hold certain investments as trading securities and whereby the changes in fair value are recorded in current period income. The trading securities comprise asset-backed securities, including highly rated bonds that are primarily backed by credit card receivables.

 

(h) Limited Partnerships or Similar Entities

Investments in partnerships or similar entities are generally considered VIEs when the equity group lacks sufficient financial control. Generally, these investments are limited partner or non-managing member equity investments in a widely held fund that is sponsored and managed by a reputable asset manager. We are not the primary beneficiary of any VIE investment in a limited partnership or similar entity. As of March 31, 2017 and December 31, 2016, the total carrying value of these investments was $188 million and $178 million, respectively. Our maximum exposure to loss is equal to the outstanding carrying value and future funding commitments. We have not contributed, and do not plan to contribute, any additional financial or other support outside of what is contractually obligated.

Derivative Instruments
Derivative Instruments

(5) Derivative Instruments

Our business activities routinely deal with fluctuations in interest rates, equity prices, currency exchange rates and other asset and liability prices. We use derivative instruments to mitigate or reduce certain of these risks. We have established policies for managing each of these risks, including prohibitions on derivatives market-making and other speculative derivatives activities. These policies require the use of derivative instruments in concert with other techniques to reduce or mitigate these risks. While we use derivatives to mitigate or reduce risks, certain derivatives do not meet the accounting requirements to be designated as hedging instruments and are denoted as “derivatives not designated as hedges” in the following disclosures.

 

The following table sets forth our positions in derivative instruments as of the dates indicated:

 

   

Derivative assets

   

Derivative liabilities

 
        Fair value         Fair value  
           

(Amounts in millions)

 

Balance
sheet classification

  March 31,
2017
    December 31,
2016
   

Balance
sheet classification

  March 31,
2017
    December 31,
2016
 

Derivatives designated as hedges

           

Cash flow hedges:

           

Interest rate swaps

  Other invested assets   $ 227   $ 237   Other liabilities   $ 241   $ 203

Foreign currency swaps

  Other invested assets     4     4   Other liabilities     —       —  
   

 

 

   

 

 

     

 

 

   

 

 

 

Total cash flow hedges

      231     241       241     203
   

 

 

   

 

 

     

 

 

   

 

 

 

Total derivatives designated as hedges

      231     241       241     203
   

 

 

   

 

 

     

 

 

   

 

 

 

Derivatives not designated as hedges

           

Interest rate swaps

  Other invested assets     338     359   Other liabilities     132     146

Foreign currency swaps

  Other invested assets     1     —     Other liabilities     3     5

Credit default swaps related to securitization entities

 

Restricted other

invested assets

    —       —     Other liabilities     1     1